Monday, April 16, 2018

Distributions from account that had ceased to be an IRA were not taxable



Stacey Marks owned a retirement account, the custodian of which was the Argent Trust Co. (the Argent account). Before 2005, the Argent account qualified as an IRA.

In 2005, the Argent account made a $40,000 loan to Marks' father. It received a promissory note in exchange. In 2012, the Argent account made another loan, of $60,000, to one of Marks' friends, again receiving a promissory note in exchange.

As of December 2013, the Argent account had the following assets: (1) the two notes (with a combined face value of $100,000) and (2) $96,508 in cash. In December 2013, Marks opened a new retirement account, the custodian of which was the Equity Trust Co. (the Equity account). In December 2013, Marks attempted to roll over the assets of the Argent account to the Equity account.

On her 2013 tax return, Marks did not report that she had received a taxable distribution from the Argent account.

IRS initially determined that Marks successfully rolled over the $96,508 into the Equity account, but that the two notes were not successfully rolled over and thus had to be included in income in 2013. In its deficiency notice, IRS found that she had received a $98,000 taxable distribution from the Argent account (representing the two notes; it's unclear why they weren't valued at their full $100,000 face value), and that this amount was subject to the 10% additional penalty on early distributions under Code Sec. 72(t), and that Marks had a substantial underpayment of tax and was thus subject to a $7,071 accuracy-related penalty.

Marks challenged the determination, asserting that the two notes were distributed to her then rolled over into the Equity account.

The Tax Court, after reviewing the parties' positions, ordered them to file additional memoranda addressing the effect of the prohibited transaction rule under Code Sec. 408(e)(2)(A).

Both sides agreed that, by making the loan to Marks' father in 2005, the Argent account had engaged in a prohibited transaction and ceased to be an IRA.

Accordingly, as agreed by the parties, the Tax Court held that Marks was not required to include the $98,000 in income for 2013 because the distribution was not from an IRA. As a result, the early distribution penalty didn't apply, and there was no substantial understatement of tax giving rise to a penalty under Code Sec. 6662.
What the court did not address was whether a tax can be levied against the taxpayer for the prohibited transaction in 2005. As the audit year was 2013 it is likely that the 3 year and 6 year statute of limitations has expired and barring fraud there would be no way for the IRS to make an assessment.

Tuesday, March 27, 2018

Pass-Through Guidance Out By Summer At Earliest, IRS Says

The Internal Revenue Service will likely issue further guidance on the rule that affects how pass-through entities are taxed under the new federal tax law by late summer or early fall, the agency’s top official said Monday.

David Kautter, the acting IRS commissioner and Treasury assistant secretary for tax policy, said the IRS was working to provide answers surrounding this provision of the rule, Internal Revenue Code § 199A, in the wake of the federal tax overhaul. The guidance is essentially being built from the ground up.


Until then advice to client should be limited.  If late summer means early fall...will there be any time to plan?

Monday, March 19, 2018

Will the IRS Increase Criminal Prosecutions Now That the OVDP Program is Ending?


 As previously reported the IRS has announced that the offshore voluntary disclosure program (OVDP) will be closing on September 28, 2018. It appears that the program which began in 2009 only had 56,000 taxpayers who used one of the programs to comply voluntarily. This is an underwhelming number of taxpayers. Indeed they were only 600 disclosures in 2017. What does that mean?

 Since 2009, the IRS criminal investigation unit has investigated 1545 taxpayers on criminal violations related to international activities, of which 671 were indicted on international criminal tax violations.

 The IRS is now sending a clear signal that rather than relying on the voluntary disclosure program it will increase criminal prosecutions to effect compliance. Those who have not complied should heed this warning and file a disclosure before the deadline or otherwise face criminal prosecution!

 

Thursday, March 15, 2018

IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now


The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes. “Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

Since the OVDP's initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

Tax Enforcement

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations. “The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”

Streamlined Procedures and Other Options

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.

Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

  • IRS-Criminal Investigation Voluntary Disclosure Program;
  • Streamlined Filing Compliance Procedures;
  • Delinquent FBAR submission procedures; and
  • Delinquent international information return submission procedures.

Tuesday, February 27, 2018

Tuesday, July 25, 2017

Ultrasound Service Company was a PSC


In Reza Zia-Ahmadi, et ux., et al. v. Commissioner, TC Summary Opinion 2017-39 the taxpayers was the principal of Sound Diagnostic (a C corporation) which provided ultrasound services to medical offices and clinics throughout southern Colorado. Sound Diagnostic entered into professional service agreements with three medical clinics (professional service agreements) in 2009 and 2010. Under the professional service agreements, Sound Diagnostic contracted to provide ultrasound machines and “licensed medical professionals” qualified to perform echocardiography, cardiovascular, and vascular ultrasound services in the medical field of cardiology.

Generally, C corporations are taxed at graduated income tax rates. If, however, a C corporation is a qualified personal service corporation under IRC §448(d)(2), it will be taxed at a flat 35% income tax rate. IRC §11(b)(2).
A C corporation will be treated as a qualified personal service corporation if two tests are satisfied: (1) a function test and (2) an ownership test. IRC §448(d)(2)(A) and (B).
The court found that as the 100% principals of the company and the company employees the taxpayers met the ownership test.
The main issue was the Function Test. The requirements of the function test are met if substantially all of the corporation's activities involved the performance of services in one of the following qualifying fields: health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
Section 1.4487-1T(e)(4)(ii) defines the provision of activities in the field of health as follows:
[T]he performance of services in the field of health means the provision of medical services by physicians, nurses, dentists, and other similar health-care professionals. The performance of services in the field of health does not include the provision of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient. For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers.
Sound Diagnostic asserts that its employees do not perform services in the field of health because employees who operate the ultrasound equipment (sonographers) are not required to be licensed in Colorado, do not provide direct treatment services to patients, and do not make healthcare decisions.
The Court has held that the scope of the qualifying fields under IRC §448(d)(2) does not turn on State licensing laws citing Kraatz & Craig Surveying, Inc. v. Comm’r, 134 T.C. 167, 181 (2010). Rather, whether a service is performed in one of the qualifying fields “is to be decided by all relevant indicia, including the text of the statute, its legislative history and regulations, application of the normal meaning of the term `health'***and examination of services historically regarded as within the qualifying field.”
Sound Diagnostic proposes a narrow interpretation of the term “health”. The Tax Court previously rejected taxpayers' overly restrictive arguments in defining the various services listed in the IRC §448 temporary income tax regulations. Rainbow Tax Serv., Inc. v. Commissioner, 128 T.C. 42 (2007) (holding that the taxpayer's definition of accounting services was overly restrictive).
The court noted that the temporary income tax regulations do not so narrowly construe the requirements of the function test under IRC §448(d)(2). Rather, the phrase “field of health” includes services provided by healthcare professionals that are directly related to a medical field. See IRC §1.448-1T(e)(4)(ii).
The court cited the two year training which the taxpayer had to undergo to administer an ultrasound.
The court ruled that sonographers are more similar to physicians and nurses than to health club or health spa employees. Therefore, the taxpayer, in performing the ultrasound activities as a sonographer, was a healthcare professional.
PRACTICE POINTER:
Under IRC §448 a C corporation which is a personal service corporation can use the cash method even if their gross receipts exceed $5,000,000. That's the good news. The bad news is the result reached here; as a C corporation it earnings are taxed at the highest corporate rate. 

Thursday, July 20, 2017

Streamlined Processing of Installment Agreements


The IRS is testing expanded criteria for streamlined processing of taxpayer requests for installment agreements. The test is scheduled to run through September 30, 2017.
During this test, more taxpayers will qualify to have their installment agreement request processed in a streamlined manner. Based on test results, the expanded criteria for streamlined processing of installment agreement requests may be made permanent.
During the test, expanded criteria for streamlined processing will be applied to installment agreement requests submitted to SB/SE Campus Collection Operations, this includes the Automated Collection System (ACS). Expanded criteria will not be applied to installment agreement requests submitted to W&I Accounts Management, SB/SE Field Collection or through the Online Payment Agreement application.
One expanded criterion being tested immediately is this: Individual taxpayers with an assessed balance of tax, penalty and interest between $50,000 and $100,000 may experience accelerated processing of their installment agreement request. This will occur if the taxpayers' proposed monthly payment is the greater of their total assessed balance divided by 84 – or – the amount necessary to fully satisfy the liability by the Collection Statute Expiration Date.
For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest of $50,000 or less,
 
CURRENT Streamlined CRITERIA
TEST CRITERIA
Payment Terms
Up to 72 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration date, whichever is less
Payment Terms
None. This criteria is unchanged.
Collection Information Statement
Verification of ability to pay required in event of an earlier default for assessed balances of $25,001 to $50,000
Collection Information Statement
Not required.
Payment Method
Direct debit payments or payroll deduction required for assessed balances of $25,001 to $50,000
Payment Method
Direct debit payments or payroll deduction is preferred, but not required.
Notice of Federal Tax Lien
Determination not required for assessed balances up to $25,000.
Determination is not required for assessed balances of $25,001 - $50,000 with mandatory use of direct debit or payroll deduction agreement.
Note: If taxpayer does not agree to direct debit or payroll deduction, then they do not qualify for Streamlined IA over $25,000.
Notice of Federal Tax Lien
No change in criteria for assessed balances up to $25,000. 
Determination is not required for assessed balances of $25,001 - $50,000 with the use of direct debit or payroll deduction agreement.
Note: If taxpayer does not agree to direct debit or payroll deduction, then they do qualify for Streamlined IA over $25,000, but a Notice of Federal Tax Lien determination will be made.
The test criteria discussed above also applies to all out of business debts up to $25,000 and all out of business sole-proprietorship debts up to $50,000. For in-business taxpayers, test criteria apply to income tax only debts up to $25,000.
For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest between $50,001 and $100,000,
CURRENT CRITERIA
TEST CRITERIA CHANGES
None - Streamlined processing criteria currently does not apply to assessed balances of tax between $50,001 and $100,000
 
Payment Terms
Up to 84 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration date, whichever is less
 
Collection Information Statement
Not required if the taxpayer agrees to make payment by direct debit or payroll deduction
 
Payment Method
Direct debit payments or payroll deduction is not required; however, if one of these methods is not used, then a Collection Information Statement is required.
 
Notice of Federal Tax Lien
Determination is required.
The test criteria discussed above also applies to all out of business sole-proprietorship debts between $50,001 and $100,000.